A Doctor’s Guide to Asset Protection Trusts

Trusts are becoming increasingly popular parts of estate planning. But there’s a difference between the various types of trusts available; choosing the right one may mean the difference between whether or not your assets are safeguarded.

An “asset protection trust” could be the solution for those who want to protect their assets from creditors.

What is this type of trust, and why is it so popular with physicians? We’ll answer those questions and more in this doctor’s guide to asset protection trusts.

What is an Asset Protection Trust (APT)?

APTs fall under the umbrella of irrevocable trusts. However, they have unique factors that allow for both protection of and access to assets that traditional irrevocable trusts do not afford.

The Basics of APTs

APTs increase the protection barrier between your assets and creditors, creating a legal wall that allows only the beneficiaries to access to the account’s assets.

In an APT, you can be both the trust’s grantor and the beneficiary who has access to the trust assets when there are no creditor issues.

If such issues arise, the trust is typically written so that the trustee can no longer distribute assets to you at that time — effectively shielding the trust assets from claims against you.

Limitations on the Legalities of APTs

Currently, asset protection trusts are legal in some states, but not all. If you’re considering adding this type of estate planning to your portfolio, you should know that, per the American Bar Association, APTS are only permitted in:

• Alaska
• Delaware
• Hawaii
• Missouri
• Nevada
• New Hampshire
• Ohio
• Oklahoma
• Rhode Island
• South Dakota
• Tennessee
• Utah
• Virginia
• Wyoming

Three Major Categories of Asset Protection Trusts

More specifically, your state may or may not permit certain types of APTs. In this section, we’ll explain these three categories and their legalities.

Domestic Asset Protection Trust (DAPT)

DAPTs, as they’re usually referred to, are one of the simplest types of APTs to establish. These self-settled trusts are permitted in all of the states listed above, in addition to:

• Michigan
• Mississippi
• West Virginia

The domestic APT protects your assets as long as they’re within United States jurisdiction.

Foreign Asset Protection Trust (FAPT)

Generally referred to as an Offshore Trust, an FAPT is established outside the US. Because of this, offshore trusts offers a different type of protection based on the reach of U.S. courts.  However, many serious tax and security issues are raised when considering a FAPT– and one must work with experienced counsel both in the U.S. and in the foreign country to navigate such issues properly.

Some countries use the Offshore Asset Protection Trust (OAP), which offers taxpayers benefits regardless of where their assets are held.

Medicaid Asset Protection Trust (MAPT)

To qualify for Medicaid, a person can’t own assets beyond a set threshold. This can make planning long-term care (LTC) challenging. However, without this state-sponsored program, a person in an LTC home may deplete their bank accounts quickly.

MAPTs are trusts that reduce or eliminate assets for Medicaid consideration by placing them out of reach.

Without instant access to these assets, a person can qualify to collect Medicaid benefits and continue receiving their investment income while living in an LTC home.

Medicaid also assists with covering health care costs that aren’t paid for by you or your family member’s insurance, making it a smart fiduciary tool.

Note that every state’s Medicaid eligibility rules vary. Your financial advisor can discuss factors like income thresholds, personal asset limits, and look-back periods to help you understand whether this trust is ideal for you.

How Are APTs Funded?

Because asset protection trusts are complex, they should be drafted by an experienced attorney. These trusts aren’t beneficial until funded, so drafting is just the first step.

You should be financially comfortable enough to separate yourself from these assets without causing a budgetary strain.

When you’re ready to fund an APT, you can use cash and securities, as well as business interests such as LLC membership interests or corporate stock. Some people choose to fund their APTs with real estate investments.

These assets are then transferred to the APT with the help of financial planners, lawyers, and insurance brokers. The process is time-consuming, as each asset must be reviewed and approved based on its effect on:

• Taxation
• Future distribution
• Legal protection

What Are the Pros and Cons of an Asset Protection Trust?

With all the complexities involved in creating and funding an APT, why are they so popular with physicians?

The answer is simple: when you have access to as much wealth as you’ll likely accrue over your career, you need a place to store it to keep it safe.

Still, APTs aren’t right for everyone. Here, we’ll look at the pros and cons of this type of account to guide you in your decisions.

Benefits of an APT

Doctors face a threat that most people don’t worry about — the concern of malpractice suits with every patient they see. APTs offer protections from the danger of these lawsuits.

They’re helpful for those exposed to personal injury and malpractice claims, as well as creditor claims filed because of other future potential risks. You can’t access the funds in your trust easily, and neither can your creditors.

This creditor protection makes APTs ideal for those with high net worths concerned about ensuring their assets are available to their beneficiaries. But as an estate planning tool, APTs (and trusts in general) benefit your loved ones in other ways, as well.

Probate is a natural part of the legal process after someone passes away without joint ownership, payable on death (POD) or transfer on death (TOD) assignments, or a living trust. Through probate, a judge appoints someone to manage the estate and collect the assets of the deceased, whether bank account funds or property. They also collect the debts and pay them. Once the debts are paid, the executor distributes the assets to the heirs. This can take months or, in some cases, years to complete.

Trusts are designed to bypass the probate process. This advantage expedites the legalities after your death, giving your beneficiaries access to all assets covered in the trust.

Disadvantages of an APT

APTs are irrevocable. Once the assets are transferred, you cannot access them outside of the ways the trust allows. If an emergency arises, those funds may not be available to you.

This disadvantage doesn’t mean you can’t have a trust at all.

You may consider talking to your attorney about a revocable living trust. This type of legal document permits the grantor to keep control of their assets and designate someone else to make financial decisions for them should they be unable to do so.

Revocable trusts still:

• Avoid probate
• Minimize your estate taxes (Learn more: Estate Planning Essentials for All Ages)
• Protect your privacy

However, assets in these trusts are still accessible to creditors.

Another downside is that setting up an APT takes time. It can also become expensive due to the need for expert attorney involvement. The costs accrue further if you appoint someone as trustee, as they typically receive a fee to perform their duties.

How Are Asset Protection Trusts Established?

Asset protection trusts are complex because of the legalities behind them. However, establishing an APT only involves two main steps.

First is the general irrevocable trust formation. In this step, you’ll choose a trustee and name the trust beneficiaries. This part also includes specifying instructions for the trustee to handle the assets until your beneficiaries receive them. The attorney drafts the trust document based on that information, and you move on to the next step, funding the trust.

This part is where you’ll want to have a trusted financial advisor working alongside you and your attorney. They may suggest that, as a physician, you consider establishing a limited liability company before funding the trust.

Review all tax implications with your tax advisor, then choose the assets you’ll use to fund the trust. Finally, you’ll work with your attorney to transfer the assets.

Conclusion

Including an asset protection trust in your estate planning is a decision that shouldn’t be taken lightly. There are various trust laws, tax concerns, and different types of asset protection trusts to consider.

Our financial professionals' at OJM Group are available to review your situation and goals, and help you examine the federal and state laws regarding trusts. Together, we can establish an account that meets your financial targets and keeps your wealth where it belongs — within your control.